Uniform Financial Reporting Standards for HUD Housing Programs

Federal RegisterSep 1, 1998

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SUMMARY: This rule makes final a June 30, 1998 proposed rule that

proposed to establish for HUD's Public Housing, Section 8 housing, and

multifamily insured housing programs uniform annual financial reporting

standards. The rule requires public housing agencies and project owners

of HUD-assisted housing, which already, under longstanding regulatory

and contractual requirements, submit financial information on annual

basis to HUD to submit this information electronically to HUD. The rule

also requires that the annual financial information to be submitted to

HUD must be prepared in accordance with generally accepted accounting

principles (GAAP). Electronic submission is important in reducing the

administrative burden that manual submission presents to housing

authorities, project owners, mortgagees and HUD. It is also important

in bringing HUD and its program partners up-to-date with modern

technology. Reporting in GAAP is important because GAAP accounting is

more widely accepted and allows for financial consistency among various

entities.

The objective of this rule is to standardize the annual financial

information submission process and, through standardization, bring

consistency and increased fairness to the evaluation of the financial

condition of housing assisted under various HUD programs. This final

rule takes into consideration public comments received on the June 30,

1998 proposed rule.

EFFECTIVE DATE: October 1, 1998.

FOR FURTHER INFORMATION CONTACT: For further information contact the

Real Estate Assessment Center, Attention Paul Maxwell, Department of

Housing and Urban Development, 490 L'Enfant Plaza East, SW, Room 8204,

Washington, DC 20410; telephone (202) 755-7540, ext. 132 (this is not a

toll-free number). Persons with hearing or speech impairments may

access that number via TTY by calling the Federal Information Relay

Service at (800) 877-8399.

SUPPLEMENTARY INFORMATION:

I. The Proposed Rule

On June 30, 1998 (63 FR 35662), HUD published a proposed rule that

would establish for HUD's public housing, Section 8 housing, other

assisted housing, and multifamily insured housing programs annual

financial reporting standards. The rule proposed to require public

housing agencies and project owners of HUD-assisted housing, which

already, under longstanding regulatory and contractual requirements,

submit financial information on annual basis to HUD to submit this

information electronically to HUD in accordance with a standardized

format to be established by HUD. The rule also proposed that the annual

financial information to be submitted to HUD must be prepared in

accordance with generally accepted accounting principles (GAAP).

Electronic Submission

Electronic submission was determined important in reducing the

administrative burden that manual submission presents to housing

authorities, project owners, mortgagees and HUD. It is also important

in bringing HUD and its program partners up-to-date with modern

technology. With the dramatic growth of personal computer ownership,

reports are compiled electronically and electronic reporting will allow

for the rapid submission of the reports and enhances HUD's ability to

analyze these reports quickly, which is of benefit to the reporting

entities (or individuals).

GAAP Accounting

The rule also proposed to require that the annual financial

information to be reported to HUD must be prepared in accordance with

generally accepted accounting principles (GAAP). ``Generally accepted

accounting principles'' has the meaning specified in generally accepted

auditing standards issued by the American Institute of Certified Public

Accountants (AICPA). Under GAAP, the accounting principles and

financial reporting standards are established by the Governmental

Accounting Standards Board (GASB) for governmental entities, and by the

Financial Accounting Standards Board (FASB) for nongovernmental

entities. Reporting in GAAP was determined important because GAAP

accounting is more widely accepted and allows for financial consistency

among various entities. HUD's FHA multifamily program participants are

already reporting in GAAP (and have been for sometime). The requirement

for all financial reports to be prepared in accordance with GAAP would

bring public housing agencies (PHAs) under similar accounting standards

as FHA multifamily program participants, thereby increasing consistency

and fairness in the reporting process, including the evaluation of

these reports.

Report Submission Date

The rule proposed that the annual submission date for the report

would be sixty (60) days after the end of the covered entity's fiscal

year. The proposed report due date was consistent with the reporting

deadline established for multifamily program participants, and would

have added an additional 15 days to the established annual reporting

deadline for PHAs.

Standardized Format

In the proposed rule, HUD explained that the format of the

financial report would be substantially the same for all covered

programs, although the format may vary in certain respects to reflect

different types of reporting entities (e.g., owners of multifamily/FHA-

related housing vs. PHAs). However, the content of the annual financial

report to be submitted to HUD would not have been materially altered by

the proposed rule; the proposed rule would have continued to require

much of the financial information that is now submitted to HUD. The

manner in which the financial information is prepared and the format in

which it is submitted would be altered by the requirements to comply

with GAAP and to submit the report electronically and in a standardized

format. A standardized format is anticipated to bring uniformity and

consistency to the evaluation of the financial data. Electronic

submission is anticipated to bring efficiency to the process and reduce

administrative burden.

Covered Programs

HUD proposed to apply the uniform financial reporting standards to

owners and/or administrators of housing under the following HUD

programs:

1. Public Housing

The reporting requirements would apply to PHAs receiving assistance

under sections 5, 9, or 14 of the U.S. Housing Act of 1937 (42 U.S.C.

1437c, 1437g, and 1437l) (the 1937 Act).

2. PHAs Administering Section 8 Housing Assistance Payments Programs

The reporting requirements would apply to PHAs as contract

administrators for any Section 8 project-based or tenant-based housing

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assistance payments program, which includes assistance under the

following programs:

(i) Section 8 project-based housing assistance payments programs,

including, but not limited to, the Section 8 New Construction,

Substantial Rehabilitation, Loan Management Set-Aside, Property

Disposition, and Moderate Rehabilitation (including the Single Room

Occupancy program for homeless individuals);

(ii) Section 8 Project-Based Certificate programs;

(iii) Any program providing Section 8 project-based renewal

contracts; and

(iv) Section 8 tenant-based assistance under the Section 8

Certificate and Voucher program.

3. Owners of Housing Receiving Section 8 Project-Based Housing

Assistance

The reporting requirements would apply to owners of housing

assisted under any Section 8 project-based housing assistance payments

program:

(i) Including, but not limited to, the Section 8 New Construction,

Substantial Rehabilitation, Loan Management Set-Aside, and Property

Disposition programs;

(ii) Excluding the Section 8 Moderate Rehabilitation Program (which

includes the Single Room Occupancy program for homeless individuals)

and the Section 8 Project-Based Certificate Program.

4. Multifamily Housing

The reporting requirements would apply to owners of housing

receiving assistance or loans under the following HUD programs:

(i) Section 202 Program of Supportive Housing for the Elderly;

(ii) Section 811 Program of Supportive Housing for Persons with

Disabilities; and

(iii) Section 202 loan program for projects for the elderly and

handicapped (including 202/8 projects and 202/162 projects).

The reporting requirements would also apply to owners of all

housing with mortgages insured, coinsured, or held by HUD, or housing

that is receiving assistance from HUD. Such housing would include, but

may not be limited to, housing under the following authorities:

(iv) Section 207 of the National Housing Act (NHA) (12 U.S.C. 1701

et seq.) (Rental Housing Insurance);

(v) Section 213 of the NHA (Cooperative Housing Insurance);

(vi) Section 220 of the NHA (Rehabilitation and Neighborhood

Conservation Housing Insurance);

(vii) Section 221(d)(3) and (5) of the NHA (Housing for Moderate

Income and Displaced Families);

(viii) Section 221(d)(4) of the NHA (Housing for Moderate Income

and Displaced Families);

(ix) Section 231 of the NHA (Housing for Elderly Persons);

(x) Section 232 of the NHA (Mortgage Insurance for Nursing Homes,

Intermediate Care Facilities, Board and Care Homes);

(xi) Section 234(d) of the NHA (Rental) (Mortgage Insurance for

Condominiums);

(xii) Section 236 of the NHA (Rental and Cooperative Housing for

Lower Income Families);

(xiii) Section 241 of the NHA (Supplemental Loans for Multifamily

Projects); and

(xiv) Section 542(c) of the Housing and Community Development Act

of 1992 (12 U.S.C. 1707 note) (Housing Finance Agency Risk Sharing

Program).

Proposed Implementation Schedule. As described in the June 30, 1998

proposed rule, for PHAs (as recipients of assistance under sections 5,

9, or 14, or as contract administrators of the various Section 8

assisted housing programs listed above), HUD proposed that the

requirement of electronic submission of GAAP-based financial reports,

in the manner and in the format prescribed by HUD, would begin with

those PHAs with fiscal years ending September 30, 1999 and later.

Unaudited financial statements would be required 60 days after the

PHA's fiscal year end (i.e., November 30, 1999), and audited financial

statements would then be required no later than 9 months after the

PHA's fiscal year end, in accordance with the Single Audit Amendments

Act of 1996 and revised OMB Circular A-133. For all other entities to

which this rule would apply (``other covered entities''), HUD proposed

that the requirement of electronic submission of GAAP-based audited

financial reports, as provided in this rule, would begin with those

other covered entities with fiscal years ending December 31, 1998 and

later.

II. Changes at the Final Rule Stage

The initial due date for the receipt of public comments on the

proposed uniform financial reporting standards was July 30, 1998. HUD

published a notice extending the deadline for public comments until

August 13, 1998 (63 FR 41754). HUD received 73 comments on the proposed

rule.

As a result of the public comments, the following two changes were

made to the rule at the final rule stage.

1. Report Submission Deadline for Multifamily Housing Properties Is

April 30, 1999 for First Year of Compliance

The final rule provides that for the first year of implementation

of the uniform financial reporting requirements, the annual report

submission deadline for entities (or individuals) with fiscal years

ending December 31, 1998 reporting on multifamily housing properties is

April 30, 1998 for the first year of compliance only.

2. Clarification of Owner Responsibility for Submission of Financial

Report

The final rule clarifies that the owner is responsible for the

submission of the financial report.

III. Discussion of Public Comments

The majority of the public commenters on this rule supported the

proposed changes in annual financial reporting announced in the June

30, 1998 proposed rule. The commenters stated that accounting in

accordance with GAAP and electronic submission reporting were steps in

the right direction. They commented that: reporting in accordance with

GAAP will bring more standardization and thus more comprehensive

understanding of financial reports produced by housing authorities; a

significant byproduct of the conversion to GAAP will be to make

agencies much more conversant with the private industry; and use of

electronic submission of annual statements via the internet would

result in significant benefits to both HUD and program participants.

The majority of the commenters supporting these changes, however,

expressed reservations about certain components of the proposed rule,

and particularly expressed reservations about the following three

areas. First, the commenters expressed concern that the implementation

date for financial reporting changes was too early, and would not allow

sufficient time to make the conversion to GAAP and electronic

submission. Second, the commenters expressed concern that there would

be increased costs as a result of conversion to GAAP and electronic

submission. Third, the commenters expressed concern about the annual

report submission due date. The commenters thought a report due date of

60 days after the end of the fiscal year was not reasonable,

particularly during the first year of compliance with the reporting

requirements.

As already noted in section II of this preamble, the final rule

provides for an extended report due date for the first

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year of compliance for entities (or individuals) with fiscal years

ending December 31, 1998 and reporting on multifamily housing

properties. For PHAs, the final rule provides, as did the proposed

rule, for compliance with the reporting requirements beginning with

fiscal years ending September 30, 1999 and later. The longer

implementation period for PHAs, and the changes made by this final rule

with respect to multifamily housing properties, should address to a

significant degree concerns about the implementation date, and should

minimize costs concerns raised by the commenters as will be discussed

further below. The following provides a more detailed discussion of

these concerns as well as other issues raised by the public commenters

on the June 30, 1998 proposed rule.

A. General Comments on the Proposed Rule

The Public Comment Period for the Rule Was Not Sufficient

Several commenters responded that a 30-day comment period for the

proposed rule was inadequate. The commenters stated that 30 days is not

sufficient time for a rule that addresses such critically important

responsibilities of housing providers.

HUD notes that the public comment period for this rule was extended

through August 13, 1998 in response to commenters' request.

Additionally, HUD notes that although the financial reporting changes

proposed in the June 30, 1998 rule address important responsibilities,

the changes themselves are not dramatic. First, the rule does not

impose a new annual financial reporting requirement. The statutes,

regulations and contracts governing HUD housing programs currently

provide for the annual submission of financial information to HUD, as

well as such other information that HUD may require to monitor

compliance with program statutory, regulatory, and contractual

requirements.

Second, the financial information to be submitted is not changed

significantly by this rule. As the proposed rule stated, much of the

financial information that is now submitted to HUD would continue to be

submitted to HUD. The changes in financial information that HUD has

targeted for revision are those that result in a needed update to

reflect existing requirements, the elimination of redundant

information, or greater standardization. These changes are designed to

reduce the administrative burden of preparing the annual financial

information.

Third, FHA multifamily program participants have been reporting in

accordance with GAAP for a substantial period of time. There are some

changes in GAAP reporting for the annual financial report to be

submitted by multifamily program participants but these changes are

those that primarily result from the issuance of an updated chart of

accounts that captures accounting information that is already

separately recorded by project owners. PHAs that have not yet converted

to GAAP (and a number of PHAs already have) will not be disadvantaged

by the new reporting requirements because again the final rule

provides, as did the proposed rule, that reporting in accordance with

the uniform financial reporting requirements will begin with PHAs with

fiscal years ending September 30, 1999 and later.

Fourth, electronic reporting should not create an undue

administrative burden for entities covered by this rule. With the

dramatic growth of personal computer ownership and the even more

dramatic growth of internet access through personal computers, most

entities, including small entities, have internet access. As discussed

later in this rule, PHAs and FHA multifamily program participants are

already submitting electronically to HUD data necessitated under other

program requirements.

Fifth, as the June 30, 1998 proposed rule discussed, in the

development of the uniform financial reporting requirements, HUD

created working groups involving HUD's program participants and others

familiar with both FHA properties and public housing properties, GAAP

reporting and electronic submission, to examine the annual financial

information that is now submitted to HUD and how preparation and

evaluation of that information could be made less burdensome while

preserving the enforcement integrity of the information. HUD also

posted this rule on HUD's web page to provide greater dissemination of

notice of this proposed rulemaking, and the Federal Register also

provides electronic posting of published rules. Given the pre-

publication discussions with program participants, the limitation on

changes to financial reporting requirements proposed by the June 30,

1998, and the benefits to be reaped through implementation of uniform

financial reporting requirements, HUD believes that the comment period

provided was adequate.

The Rule Needs to Provide Additional Information About the Financial

Reporting Requirements

Several commenters stated that the proposed rule failed to provide

the specifics on the implementation of the reporting requirements and

on the financial information to be provided. One commenter stated that

the proposed rule failed to describe what information is to be

submitted and by whom. Another commenter asked who will provide the

necessary software and training that will be needed in complying with

these requirements.

HUD believes that the proposed rule was clear on the implementation

schedule of the uniform financial reporting requirements, both in the

preamble to the rule and the text of the rule. That schedule is also

found later in Section IV of this preamble under the heading

``Compliance Schedule for Uniform Financial Reporting Requirements.''

With respect to the details of the financial information to be

reported, HUD's current regulations, and indeed other agency

regulations, have not provided in regulatory text the details of the

financial information to be submitted. This information can be lengthy

and technical and not suitable for an authority (the Code of Federal

Regulations) which is updated only once a year. The regulation provides

the broad reporting requirements, but the specifics of the financial

information is left to supplemental documents such as handbooks and

guidebooks, which allow for a more detailed discussion of the financial

information to be submitted (and therefore more helpful), allows for

examples and model reports to be included, and can be corrected and

updated easily, as a result of users' suggestions and recommendations,

and as a result of experience in using the model reports and forms

provided.

HUD's approach to the uniform reporting requirements will follow

this traditional practice. As changes have come about in reporting

requirements, HUD developed the necessary guidance for its program

participants. For example, when revisions were made to OMB Circular A-

133 (Audits of States, Local Governments, and Nonprofit Organizations)

as a result of changes made by the Single Audit Amendments Act of 1996

(Pub. L. 104-156, approved July 5, 1996), HUD developed and issued the

necessary guidance to assist program participants in understanding and

complying with the changes made by this statute and the revised

circular. HUD revised and issued Handbook 2000.04 REV-2 on Consolidated

Audit Guide for Audits of HUD Programs.

[[Page 46585]]

HUD also issued a notice to all multifamily project mortgagors on the

new audit requirements resulting from the statute and legislation

(Notice H-98-25, issued April 24, 1998). Another example of detailed

assistance is the guidance that HUD prepared and issued on the Annual

Financial Data Submission Requirements. This guidance, issued December

9, 1997, details the requirements for electronic submission of annual

financial data to HUD by multifamily housing project owners, or their

authorized employees or agents. For PHAs, HUD has developed and made

available a HUD-GAAP Conversion Guide for PHAs. This guidance document

is in the final development stage.

As has been the case in the past, HUD will provide the necessary

additional details and documentation, and guidance and technical

assistance that entities covered by this rule will need to comply with

the uniform financial reporting requirements.

Implementation of the Uniform Financial Reporting Requirements Should

Be Delayed for One Year

Several commenters stated that compliance with the uniform

financial reporting requirements, which will entail conversion to GAAP

and electronic submission, constitute major changes and the start-up

dates in the rule are not reasonable. Other commenters suggested that

these requirements first be instituted as a pilot or test program

before national implementation.

HUD has carefully considered the comments and suggestions regarding

the rule's implementation dates and has concluded that, except for the

changes made by this final rule, the dates provided in the June 30,

1998 proposed rule should remain applicable. Again, HUD's multifamily

housing program participants already report in accordance with GAAP and

have been reporting in GAAP for a considerable period of time. HUD

acknowledges that the implementation schedule for entities (or

individuals) reporting on multifamily housing properties and that have

fiscal years ending December 31, 1998, will require conversion to HUD's

uniform financial reporting requirements in the middle of an accounting

cycle. This conversion, however, is not anticipated to be a difficult

transition to make because the changes to be addressed for multifamily

property annual financial reports (that are already prepared in

accordance with GAAP) are those that primarily result from the issuance

of an updated chart of accounts that captures accounting information

that is already separately recorded by multifamily housing project

owners. Although the conversion changes for entities and individuals

are not anticipated to be difficult, HUD has provided in the final

rule, as already discussed in this preamble, an extended report

submission date for the first year of compliance for those entities (or

individuals) that have fiscal years ending December 31, 1998 and are

reporting on multifamily housing properties.

With respect to electronic submission, many FHA multifamily program

participants already submit reports electronically to HUD. For example,

24 CFR part 208 provides for the electronic transmission of certain

required data pertaining to certification and recertification of

tenant's eligibility for multifamily subsidized projects. This rule was

promulgated in 1993. More recently, HUD published a proposed rule that

would require mortgagees that hold or service multifamily mortgages

insured by HUD to submit to HUD electronically data on mortgage

delinquencies, defaults, and defaults, among other things. This rule

published on May 13, 1998 (63 FR 26702) provided a 60-day public

comment period, and no public comments were received on the rule.

In the case of PHAs, the rule allows a full fiscal year to convert

accounting systems and records to provide the few new or changed

accounts and entries necessary to convert to GASB/GAAP and HUD's

revised annual reporting requirements. While the lead time is not long

for affected PHAs with fiscal years beginning October 1, 1998, HUD's

guidelines show that the nature of the changes will not require an

extensive break-out or reconstruction of transaction detail, even if

the changes are made in the middle of an annual accounting cycle. With

respect to electronic submission, PHAs also already submit various

reports electronically to HUD. For example, 24 CFR part 908 provides

for the electronic transmission of certain required family data for

PHAs operating public housing, Indian housing or Section 8 Rental

Certificate or Voucher programs.

HUD also reminds entities subject to compliance with the uniform

financial reporting requirements that the final rule provides, as did

the proposed rule, that HUD may approve transmission of the financial

data by tape or diskette if HUD determines that the cost of electronic

transmission via the internet would be excessive.

HUD wants the uniform financial reporting requirements to succeed,

to assist and benefit HUD's program participants, as well as HUD. HUD

will provide the necessary guidance and technical assistance, and as

the process gets underway, HUD will carefully consider any

circumstances that may arise and may make compliance with these

reporting requirements difficult or necessitate additional time in a

given situation.

The Content and Format of the Financial Report Should Be Published for

Comment

Five commenters requested that the content and format of the

financial report be published for advance notice and comment.

HUD will make the content and format of the report available.

Again, however, as HUD noted in the proposed rule, the uniform

financial reporting requirements do not substantively change the

existing annual financial reporting requirements of HUD's housing

program participants, or the format in which the information is to be

submitted. The rule will result in some changes to the chart of

accounts used in financial reporting to HUD, including changes to:

streamline or eliminate unnecessary account detail; add some additional

accounts required to comply with new GASB/GAAP requirements for PHAs;

and update the multifamily housing chart of accounts to more fully

capture existing program requirements.

Currently, HUD guidelines on the specific nature of these changes

is available from the HUD/REAC web site (http://www.hud.gov/reac/

reafin.html). As the HUD/REAC system development effort nears

completion, further guidance on specific procedures for reporting

formats and electronic submission will be provided.

Uniform Financial Reporting Will Not Assure Comparative Analysis of

Performance.

A few commenters stated that HUD's assumption that uniform

financial reporting of financial data will facilitate more effective

analysis of project operating data is not necessarily correct. The

commenters stated that the financial conditions of the projects under

review (public housing and multifamily properties) are so different and

so any variations are involved in each of these categories, that

uniform financial reporting will not achieve the comparative analysis

HUD desires.

The rule's primary purpose is to provide for greater uniformity in

the accounting principles, account structure, and financial and

compliance reporting formats applicable to HUD's housing programs. HUD

acknowledges the basic differences between its PHA

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and FHA multifamily housing, but believes that the uniform financial

report procedures, coupled with new electronic submission requirements,

the rule's uniform standards will greatly enhance HUD's ability to

perform timely, meaningful comparative analyses of the financial

performance and compliance of its housing program participants and

portfolio.

The Rule Adversely Impacts Small Entities

Several commenters stated that the changes in reporting

requirements proposed by the June 30, 1998 rule would adversely impact

small entities.

HUD disagrees with the commenters that the uniform financial

reporting requirements will have a significant economic impact on a

substantial number of small entities for several reasons. First, for

small entities reporting on multifamily properties, these entities are

already familiar and reporting in accordance with GAAP accounting.

Multifamily chart of account changes primarily pertain to needed

updates to better reflect existing rather than new requirements. For

small PHAs, HUD has provided a year before reporting in GAAP is

required. Second, HUD notes that the Single Audit Act Amendments of

1996 raised significantly the monetary threshold for when an entity

that receives Federal assistance is required to have an audit. The

threshold was raised from $25,000 to $300,000. This change

significantly reduces reporting costs for small entities. Therefore,

although small entities must continue to submit an annual financial

report to HUD, an audited report is not required. Third, the June 30,

1998 proposed rule although clearly expressing a preference for

internet submission of financial reports provides that HUD will approve

transmission of financial data by tape or diskette if HUD determined

that the cost of electronic internet transmission would be excessive.

Fourth, the change made at this final rule stage (the extended report

due date for certain entities reporting on multifamily housing

properties) also will contribute to reducing any possible

disproportionate administrative burden that this rule may have had on

small entities. Additionally, to further ease any administrative burden

on small entities, and all entities subject to these requirements, HUD

will provide submission software, supplemental guidance, training and

other technical assistance.

B. Comments on Reporting in Accordance with GAAP

Conversion to GAAP Will Take Longer and Be More Costly than HUD

Estimates and Will Not Bring Consistency

Several PHA commenters stated that the conversion to GAAP will take

longer and be more costly than HUD estimates. These commenters stated

that the conversion of PHA financial statements from the current HUD

reporting to a GAAP basis may not be as simplistic as HUD staff

foresees; could require significant effort for the auditor and the

organizations; and could result in major differences in the financial

statement amounts if PHAs are treated as business-type activities

rather than governmental entities.

HUD understands PHA concerns about the conversion to GAAP, but

believes that these concerns are based on misunderstanding or

misconceptions about GAAP. First GAAP standards take into account

governmental entities. As noted in the proposed rule, there is

``governmental GAAP''--that is, financial reporting standards

established by the Governmental Accounting Standards Board (GASB).

These standards are sometimes referred to as GASB GAAP. Second, GAAP

standards are not as rigid as some of the commenters may believe. GAAP

permits choices among acceptable options for certain accounting

transactions. For PHAs, GAAP permits two types of reporting mechanisms,

the governmental method and the enterprise methods. The use of either

method is acceptable to HUD. Each PHA has the discretion to determine

its own method. The guiding criteria should be the type of activities

performed by the PHA.

Because the purpose of converting to GAAP is to achieve uniform and

consistent financial data from all reporting entities, HUD has selected

preferred options for those transactions within the two types of

methods (governmental and enterprise) where GAAP allows an entity to

choose from more than one method. HUD's PHA GAAP Conversion Guide

identifies HUD's preference on the allowable treatment of select

accounting issues to provide desired standardization across the HUD-

supported portfolio. For example, HUD will prefer that PHA's: accrue

all expenses, expense inventory as consumed, report depreciation on

fixed assets, and report the accrual of compensated absences. These

preferences are all allowable under GASB/GAAP, and under both a

governmental or enterprise fund model. Additionally, HUD points out

that conversion to GAAP does not require change of recordkeeping.

HUD notes that for PHAs the GAAP conversion process entails only

year-end adjustments to convert a PHA's recordkeeping so that

information may be reported under GAAP. Compliance with GAAP does not

require the whole-sale conversion of PHA accounting software in order

to meet the rule's implementation date for PHAs, nor does it require

PHAs to change their current accounting and recordkeeping systems. PHAs

are only required to report this information using GAAP as the

accounting basis. Reporting financial information in accordance with

GAAP allows for financial consistency among PHAs. It also provides a

common mechanism for HUD to fairly and accurately assess the financial

condition of each PHA as compared to its peers. Additionally, GAAP

reporting presents a more accurate picture of PHA financial condition

by accounting and accruing for all liabilities that may exist.

Another commenter stated that the proposed rule mentioned two

different standard setting bodies in the proposed rule--FASB and GASB.

The commenter noted that FASB exercises jurisdiction over private

enterprises and nonprofits while GASB exercises jurisdiction over

government. The commenter asked how HUD proposes to maintain

consistency in accounting and financial reporting when there is no

consistency in the underlying accounting standards.

HUD acknowledges the distinctions between housing entities covered

by FASB/GAAP versus GASB/GAAP, but notes that FASB and GASB have been

established to be as consistent with each other as feasible given the

types of entities each covers. To maintain that consistency, HUD will

not be advocating any deviation from the appropriate standards

applicable to each housing entity. As noted earlier in this preamble,

there are various fund types and reporting options available to

entities governed under GASB/GAAP. There are options within those

variable bases of accounting which can realize consistency of treatment

of the many specific types of transactions or accounting issues.

GAAP Requires the Calculation of Depreciation, Which Is Not Currently

Done by PHAs and Benefit of This Information Unclear

Several PHA commenters expressed concern about the introduction of

depreciation (a GAAP requirement) into the public housing financial

system. The commenters stated that depreciation calculations will

increase expenses, and therefore, have an impact

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on the balance sheet and income statement.

HUD believes that the reporting of the accumulated depreciation of

PHAs assets will better enable HUD to assess a PHA's performance and

funding needs. The availability of such information will enable the PHA

to operate in a more business-like manner. Recording of depreciation

provides each PHA with a systematic allocation method showing the cost

of an asset over its useful life. The recording of deprecation permits

each PHA to show the directly related consumption of the asset over the

periods in which the asset is used. The HUD-GAAP Conversion Guide for

PHAs provides guidance and training on a straightforward, simplistic

approach to establishing the current depreciated value of fixed assets

during the conversion process.

HUD Circular Letter LM-85 Provides an Exception to GAAP Filings

Three commenters stated that under HUD Circular Letter LM-85,

accrual based financial statements prepared on the same basis of

accounting as a project's tax return are acceptable to HUD provided

that the only two differences are the write off (rather than

capitalization) of certain interest and taxes incurred during the

construction period and the methods and lives of depreciating fixed

assets. The commenters stated that this, therefore, provides an

exception to the GAAP rule in that it avoids the need for owners and

property managers to duplicate certain GAAP and income tax basis

records for many projects.

HUD Circular Letter LM-85 was superseded by HUD Handbook changes

requiring GAAP-based financial reporting by all multifamily housing

program participants. While individual HUD field offices may have

inconsistently enforced the existing requirement for GAAP-based

financial reporting, one of the objectives of this rule is to ensure

compliance with the uniform financial reporting requirements.

Changes to Existing Chart of Accounts Will Create Problems

A few commenters expressed concerns about change to the chart of

accounts. The commenters stated that the existing chart of accounts

includes surplus accounts that are unique to HUD, and these should not

be changed. The commenters also stated that the existing chart of

accounts provides for tracking subsidies on a cash basis, and confusion

would result if HUD grants and cumulative grants were no longer tracked

on a cash basis. One commenter stated that the chart of account will

not accommodate recording of transactions under both FASB and GASB.

Some commenters expressed concern that the changes to the chart of

accounts will be occurring after 1998 transactions already have been

recorded. These commenters stated that to meet the implementation

deadlines of the proposed rule, they would have to reclassify

transactions already recorded. The commenters also stated that there

would have to be changes in the computer programs now administered by

the private management companies but also in other forms and procedures

established by HUD.

HUD does not intend to eliminate the HUD surplus accounts that are

currently within the chart of accounts. Additional accounts required to

permit conformity with GAAP are being added to the chart of accounts.

With respect to subsidies, these can be tracked under GAAP. In fact,

reporting of subsidies under GAAP will provide a clearer picture of

cumulative HUD grants and will not compromise the integrity of the

operating reserve and cash analysis system. HUD also has expanded the

chart of accounts for both public and multifamily housing programs, and

the respective charts for these programs now contain the accounts

needed to fulfill HUD's needs in accordance with the appropriate FASB

or GASB requirements. The new accounts needed for PHAs to convert to

GASB/GAAP are described in HUD's ``PHA GAAP Conversion Guide.'' With

respect to concerns about changes to the chart of accounts after the

1998 reporting year is underway, HUD notes that the revisions to the

old chart of accounts for multifamily housing projects were only those

necessary to update the chart to reflect already existing requirements.

Some of the new accounts capture data previously reported on

supplemental compliance data schedules that are being eliminated under

HUD's new financial assessment process. Therefore, the changes to the

chart of accounts are not anticipated to require any extensive

reconstruction or break-out of accounting transactions to implement.

HUD has recently developed guidance that describes the specific nature

of the new chart of accounts and the basis and preferred treatment of

any additions, deletions or other changes. This guidance is available

through the HUD REAC web site. On the matter of changes to existing

handbooks and forms, HUD Handbook 4370.2 is being revised to introduce

the new chart of accounts and new HUD budget worksheets. Other

handbooks and forms will be updated as necessary.

Conversion to GAAP Will Be Burdensome to Small Entities

With respect to concerns about the administrative burden of

conversion to GAAP, and particularly that such burden that may fall on

small entities, these concerns addressed earlier in the preamble under

Section III.A. As noted earlier, HUD is allowing a full year before

reporting in GAAP will be required (again FHA multifamily program

participants are already reporting in accordance with GAAP). Also,

given that GAAP takes into account the financial distinctions of

governmental entities, and given that GAAP is not as rigid as some

commenters may believe, HUD does not believe that the conversion

process will be as burdensome as the commenters believe. HUD already

has developed, and provided to PHAs as well as posted on the HUD

website at www://hud.gov the HUD-GAAP Conversion Guide for PHAs.

C. Comments on Electronic Submission

Electronic Submission Is Administratively Burdensome and Costly

Several commenters, including those who already have converted to

GAAP, expressed concern about electronic submission of the financial

report via the internet. The commenters stated that although they

realize that electronic submission results in significant

administrative efficiencies, electronic submission via the internet

creates administrative burdens that they believe exceed the burdens of

manual submission requirements. A few commenters stated that electronic

submission adversely impacts small entities since systems of many small

property owners are not electronic and their ability to complete

electronic submissions is limited and in some instances non-existent.

Other commenters stated that electronic submission will not replace a

hard copy report and therefore the benefits for the reporting entities

are not that significant. Several commenters also raised concerns that

audit costs would increase as a result of electronic submissions

because housing authorities and agencies would ask their accountants to

handle the electronic submission.

With respect to internet transmission, HUD acknowledges that until

recently on-line transmission and on-line use of information was

generally limited to large entities. The dramatic growth in

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personal computer ownership, however, has enabled smaller entities to

access on-line information just as readily as large entities. For those

entities without internet capability at their place of business, access

is readily available at other business or public locations for

reasonable usage fees. Many Federal, State, and local government

agencies are a possible source of internet access for those in need of

internet capability, including local HUD offices.

There are significant benefits to internet capability for

information delivery. Internet capability by allowing for rapid

transmission of the data from the reporting entity to HUD, increasing

the ability of HUD to analyze the information, and facilitating HUD's

response to the reporting entity about the financial information

provided. Additionally, use of the internet eliminates the time-

consuming paperwork required to manually transmit the financial reports

to HUD.

HUD is aware that for some entities, perhaps small entities, there

may be an initial administrative burden and cost associated with the

new requirement for electronic submission of financial statements.

However, as discussed above, the widespread use of personal computers

and internet services, should make the administrative burden and cost

minimal, and this burden and cost will be offset by the increased

efficiency that electronic submission provides for the reporting entity

for HUD's overall financial oversight process.

To simplify the electronic submission process, HUD will provide

submission software to reporting entities, at no cost, that can be

downloaded from the internet. The software provides a template to more

easily enable reporting entities to submit their financial report

information, and better assures the quality of the data. This user

friendly software reduces the electronic submission process to more of

a clerical process, as opposed to the time consuming professional

accounting services effort envisioned in many of the comments. HUD will

provide training with this software and the REAC Customer Service

Center will further assist entities in understanding and fulfilling

these new requirements. Additionally, the extended report due date for

multifamily project owners with fiscal years ending December 31, 1998

should significantly ease the initial administrative burden that occurs

in the first year of compliance with the new requirements. The

software, the training, the extended report due date are steps that HUD

is taking to alleviate concerns over the degree of difficulty and cost

associated with the required electronic submission process. While it is

true that the electronic submission to HUD may not replace the need to

provide a hard copy report to other agencies or organizations for other

purposes, more and more organizations are requiring electronic

submissions of reporting. As noted earlier, HUD's program participants

are already submitting reports electronically to HUD in several areas.

With respect to the impact on small entities, in addition to the

reasons just discussed that will minimize any burden or cost associated

with internet transmission, HUD reminds the commenters that the rule

provides that HUD may consider electronic submission other than through

the internet if the cost of electronic submission via the internet

would be significant.

How Will Electronically Submitted Information Be Verified and Be Made

Secure

A few commenters asked how independent auditors would verify the

electronic information.

HUD's Financial Assessment Subsystem will contain internal edit

checks to preclude the submission of incomplete or mathematically

inaccurate information. Auditors will be able to access the financial

audit information submitted to HUD by their clients. Auditors should

check the validity of last year's report submissions as part of the

current year audit. Furthermore, HUD's REAC will have a quality

assurance program to validate audit quality and PHA and multifamily

owner data submissions. Suspected occurrences of false submissions will

be referred to HUD's Enforcement Center for the pursuit of possible

criminal, civil and/or administrative sanctions.

D. Comments on the Financial Report Due Date

Several commenters requested that the report submission date be

extended to 90 days or longer. The commenters stated that the report

due date that provides for 60-days after the end of the entity's fiscal

year is not sufficient. Other commenters stated that the report due

date is burdensome for entities who must file under OMB Circular A-133

standards.

HUD believes that the submission due date of 60 days from the end

of an entity's fiscal year is a reasonable amount of time. For entities

and individuals reporting on multifamily housing properties, this is

the standard annual financial report due date found in existing

regulatory and contractual agreements governing multifamily housing

programs. Since HUD is not substantially changing the multifamily

report requirements, additional time is not believed to be warranted,

beyond the initial compliance year, as discussed earlier in this

preamble. In the case of PHAs, the 60-day submission date gives PHAs an

additional 15 days beyond the previous 45-day submission requirement.

Additionally, for PHAs, the first year of compliance begins for fiscal

years ending September 1999. In all cases, HUD will consider extensions

of the report due date for entities submitting their first reports

under the uniform financial reporting requirements. Apart from the

first reporting year under the uniform financial reporting

requirements, requests for extensions of time can be submitted to REAC,

but these extensions only will be approved for unusual circumstances

beyond an entity's control.

With respect to entities who must file reports under A-133

standards, HUD is not requiring non-profit entities who must comply

with A-133 standards to provide all the schedules which are normally

prepared and forwarded as a part of these entities' audited financial

statements to HUD within 60 days. In accordance with A-133 standards,

the audited financial statement itself is not due to HUD until 9 months

after the end of an entity's fiscal year. In those cases, owners would

still have to submit the required unaudited financial reports within

the 60-day period, in accordance with the existing requirements of

their HUD regulatory agreement or contract.

E. Other Comments on the Proposed Rule

Compensation for the Costs of Conversion Is Necessary

Several commenters especially non-public housing agencies were

concerned that they would not be compensated for the increased costs of

conversion to GAAP and in submitting reports electronically.

As discussed earlier in this preamble, the costs of implementing

the accounting and electronic submission changes resulting from this

rule are not expected to be significant. HUD believes that any

additional cost incurred will be offset by corresponding decreases in

program participant burdens through greater efficiencies in HUD's

overall assessment of the financial condition of HUD public housing and

other HUD assisted properties. Costs associated with implementing the

new requirements are eligible project expenses under existing program

requirements.

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The Uniform Financial Reporting Requirements Constitute an Unfunded

Mandate

Several commenters stated that the electronic submission

requirements constitute an unfunded mandate under the Unfunded Mandates

Reform Act (UMRA).

Section 201 of the UMRA requires agencies to assess the effects of

Federal regulatory actions on State, local, and tribal governments, and

the private sector. HUD has assessed the effects of this rule on

housing authorities and other owners and managers of HUD housing. While

this rule provides uniform financial reporting requirements for HUD

housing, these requirements are not dramatically different from the

reporting requirements with which HUD program participants already

comply. HUD has determined that the uniform financial reporting

requirements will reduce burden after the initial transition year, and

this preamble discusses the many ways in which HUD reduced the

potential for administrative burden during the first year of

compliance. Additionally, the UMRA provides an exemption for entities

participating in voluntary Federal programs. Since HUD has assessed the

effects of this rule on State, local, and tribal governments, and on

the private sector, and since this rule does not include a Federal

mandate, HUD has complied with the Unfunded Mandates Reform Act of

1995.

Education and Training by HUD of the New Requirements Are Critical

Several commenters stressed that they wanted HUD to ensure that it

would take responsibility in providing education and training of the

uniform financial reporting requirements.

HUD acknowledges that it has this responsibility, and already has

begun providing guidance on the uniform financial reporting

requirements. Initial guidance is already available through the HUD

REAC web site or Customer Service Center, and plans are being made by

REAC for additional guidance and training of PHAs, project owners,

mortgagees, housing industry groups and CPAs.

Information Collection Burden is Understated in Rule

Four commenters stated that they thought that the information

collection burden of .75 hours reported in the Paperwork Reduction Act

Statement section of the rule was understated.

HUD appreciates the comments in this area, and is reexamining

whether the burden is greater than the .75 reported at the proposed

rule stage. HUD's decision to develop electronic submission software,

which will provide an easy to use submission template, at no cost to

housing entities, will have an impact on reducing the reporting burden

of electronic submission.

HUD Handbook 4370.2 REV Restricts Business Relationships Between

Independent Accountants and Mortgagor

One commenter stated that existing HUD policy in HUD Handbook

4370.2 REV restricts business relationships between the independent

accountants and mortgagor, except for the performance of audit,

accounting systems work and tax preparation. The commenter stated that

HUD should therefore issue a formal interpretation relative to the

definition of ``fee accountant'' which is currently defined by HUD or

an individual who performs manual or automated bookkeeping services

and/or maintains the official accounting records. HUD currently

prohibits accountants from performing the audit of the mortgage.

The term ``fee accountant'' is defined in HUD's Consolidated Audit

Guide for Audits of HUD Programs (IG 2000.04, REV-2. It is also

important to note that an accountant who keeps the books for a specific

project is prohibited from performing the audit of a project.

Why Is Reporting Responsibility Imposed on Auditor and Not Owner

One commenter asked why the responsibility is being placed on the

auditor to submit the report to HUD.

Since only one commenter asked this question, HUD believes that the

proposed rule was clear that the responsibility for the submission of

the report is with the owner. Nevertheless, the final rule clarifies

that the owner has responsibility for submission of the report to HUD.

HUD Should Reexamine the Applicability of the Uniform Financial

Reporting Requirements to Certain Programs

There were several comments suggesting that certain HUD programs

should be excluded from the applicability of the uniform financial

reporting requirements. One commenter stated that pre-1980 Section 8

projects are outside of the financial reporting requirements. Another

commenter stated that audited financial report requirements should not

be applied to Section 8 and other HUD housing subsidy programs. One

commenter stated that FHA-Insured Properties should be exempt from

audited financial report requirements, and another commenter stated

that these reporting requirements should not be applied to non-profit